Friday 31 July 2009

The micro-macroeconomic model with borrowing

Here is an extension to the small macroeconomic model described on Wednesday. It includes borrowing. Company profits are given by

P = I - C - R

and company income is given by

I = a*C + b*R.

a and b are constants that may be greater than, equal to, or less than one, depending on how the market and economic growth are interacting.

R is borrowing repaid by the company, and may increase the rate of output. If R falls, then rising inefficiency may be modelled as falls in a and b, decreasing profits. A high interest rate may be modelled as a fall in b, again lowering profits. A government may have a role to play here by increasing the availability of money through spending or printing money if the interest rate is stubbornly high for some reason outside of conventional supply and demand explanations.

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